It is “batten down the hatches” mode for appliance manufacturers who are being squeezed by rising material costs at the worst possible time—just as potential customers, concerned about the health of the economy, are holding back purchases.

Makers of premium appliance products are faring a little better, however, as they target more affluent customers who are not as concerned with the economic downturn. Some actually feel it’s wiser to invest in their homes than in the volatile stock market, says Brian Wellnitz, marketing manager, kitchen ventilation, for Broan-NuTone LLC, Hartford, Wis., which makes kitchen range hoods. This is good news for producers and distributors of stainless steel, which tends to be featured on high-end appliances.

According to the Association of Home Appliance Manufacturers in Washington, D.C., a total of 3.86 million major appliances were shipped in January, down 17 percent from a year earlier. The decline for their “AHAM 6” appliances, which include washers, dryers, dishwashers, refrigerators, freezers and ranges, showed a 7 percent decline vs. the previous January.

For the full year 2007, the trade association reported a 6.3 percent decline for all major appliances and a 5.6 percent decline in AHAM 6 appliances vs. 2006. This was the largest decline the industry has seen in over two decades, notes Jeff Fettig, chairman and chief executive officer of Whirlpool Corp., Benton Harbor, Mich.

This is not surprising given the state of the housing market and the fallout from the subprime mortgage crisis. “While appliances and housing don’t go totally hand in hand, there is a strong correlation between the two, and housing clearly is in the tank,” says John Mothersole, principal for the industry practice of Global Insight, Washington, D.C.

Sales of existing homes totaled 5.65 million in 2007, down 12.8 percent from the 6.48 million sold in 2006, according to the National Association of Home Builders, Washington, D.C. New construction is suffering, as well. Single-family housing starts in January, at 743,000 units, declined for a tenth consecutive month to the lowest rate since January 1991.

While the large selection of homes on the market, and favorable interest rates, are attracting potential buyers, says David Seiders, NAHB chief economist, “builders know there’s a difference between people looking and people buying, and their current outlook remains quite subdued. Additional measures on the legislative and policy side are definitely needed to bolster consumer confidence and help bring about a housing and economic recovery,” he adds.

Amid much speculation about when the housing market will rebound is a general consensus that it will bottom out in the first half of the year and begin a painfully slow comeback. “The problem is that housing construction is at such a low level now, even once it does start to improve, it will have a long way to go,” says Mothersole.

New homes account for a declining percentage of appliance demand, however, according to Mike Todman, president of Whirlpool North America. In the 1980s, housing construction represented about one-quarter of all major appliance sales. Today, equipping new houses and apartments with washers, dryers, stoves and refrigerators accounts for only about 15 percent of appliance demand. Renovations of existing homes account for another 15 percent, while replacement of worn out equipment constitutes 50 percent of demand. The remaining 20 percent is accounted for by discretionary purchases of the latest models, which tend to track with consumer confidence and the strength of appliance designers’ innovations.

Because fewer people are taking out loans to remodel their homes, the appliance replacement market is feeling the effects. Since most remodeling occurs within a year or two after someone moves into an existing home, the decline in home sales is dragging remodeling down with it, says Wellnitz at Broan-NuTone.

“While the housing downturn has impacted the remodeling market to some degree, it is on a much smaller scale than the rest of the market,” says Mike Nagel, NAHB remodelers chairman. “Homeowners realize the importance of maintaining their property and making necessary repairs to support the value of their homes, so we expect this type of work to start to pick up again.”

Fears about the economy and a possible recession are also weighing on appliance consumers’ buying decisions, says Evan Barrington, vice president of economic development for Stevenson Co., Louisville, Ky. “When people are concerned about their income and their job security, they aren’t likely to make as many big purchases.”

High-income individuals who could still qualify for a loan, but are hesitant to enter the current real estate market, may consider a remodeling project with high-end appliances as a good alternative. Since many people are staying in their homes longer, some are upgrading what they consider to be the most important room of the house—the kitchen—says Marni Hale, spokesperson for BSH Home Appliances Corp., Huntington Beach, Calif. BSH produces premium appliances under such brands as Bosch, Siemens, Thermador and Gaggenau.

Broan-NuTone has benefited by having a broad product line—range hoods that range from $35 to $5,000 in price. “Our products on the conventional side are not that expensive, and they make the kitchen look fresh. On the high end, they are statement pieces, and people who can afford to do so are still willing to pay to make a statement,” Wellnitz says.

In general, though, most homeowners today are hanging on to their washers, dryers, stoves and refrigerators as long as possible. According to Whirlpool’s Todman, replacement demand has consistently added 1 to 2 percent of appliance industry growth each year for the past three decades “and we fully expect this trend to continue in 2008 with many of these purchases being related to the replacement of units that consumers are either unable, or find uneconomical, to repair.”

Appliance makers are doing what they can to get consumers excited about appliances. Whirlpool is accelerating new product development and new model introductions. “Throughout the year we will introduce a record number of innovations under current brand names, including 72 new product launches,” Todman says.

Similarly, BSH announced 37 new product launches last year. Hale notes that BSH has seen a strong interest in induction cook tops and other energy-efficient appliances. “Induction is becoming increasingly more popular as more people are being educated on the electromagnetic technology,” says Hale.

Energy-saving appliance designs dovetail with the new federal energy bill passed in December. Joseph M. McGuire, AHAM’s president, says this legislation establishes the strictest federal energy efficiency standards to date for residential clothes washers and dishwashers. For the first time, it includes national water limit requirements for these products, as well as setting energy standards for dehumidifiers. It also requires the U.S. Department of Energy to consider revisions to current refrigerator energy efficiency standards. “[This legislation] demonstrates that home appliances are in the forefront of energy efficiency and provide real solutions for consumers wishing to do their part to save energy and protect the environment,” McGuire says.

These standards are supplemented with tax credits that allow manufacturers to produce “super-efficient products that make upgrading home appliances the most cost-effective step a consumer can take to save energy,” he adds.

The stainless steel industry is benefiting from this energy-saving trend, says Dan Greenfield, spokesperson for Allegheny Technologies Co., Pittsburgh, who observes that stainless is used primarily for high-efficiency dishwashers and washing machines.

Use of stainless in appliance designs continues to grow. “Demand for stainless kitchens probably won’t wane for a number of years,” says Wellnitz, who maintains that stainless steel’s highly adaptable, “brilliant neutral” look continues to be trendy, with no obvious substitute in sight. “Some people are talking about oil rubbed bronze, but I don’t think it will replace stainless. There are a lot of ways to utilize stainless and a lot of different finishes, including matte and finger-print resistant finishes.”

Certain new design trends are emerging, including a move toward bottom freezer refrigerators and front-loading washing machines, Barrington says. Front-load washers use less water and detergent, while bottom freezers are considered more usable and convenient. Such innovations, like the move to stainless steel, have enabled manufacturers to raise product prices, though they have not resulted in greater overall sales of refrigerators or washing machines, he adds.

As appliance makers are forced to raise product prices to recover their growing materials costs, this could further dampen consumer demand. According to Fettig, Whirlpool’s costs for steel, base metals, oil and resins, and components have increased by nearly $2 billion since mid-2004.

The volatility of stainless steel pricing has been very problematic for appliance producers, says Mothersole, who has observed some consumer backlash over rising appliance price tags. One recourse for manufacturers is to switch to a different stainless alloy. This, says Allegheny’s Greenfield, has resulted in increased demand for its AL201-HP product, which has lower nickel content (and therefore is less prone to the nickel surcharge volatility), with comparable strength and corrosive characteristics to 304 stainless. Appliance makers also have the option to use 400-series stainless, which has no nickel at all.

But such substitutions only offer modest relief right now. “Recently nickel has actually been relatively well-behaved, at least compared with a year ago, but ferrochrome is going through the roof,” Mothersole adds, noting that there are no low-chrome stainless alloys, as it’s the chrome that makes steel stainless.

The rise in ferrochrome’s cost, largely due to supply problems caused by the energy crisis in South Africa, has been quite substantial. High-carbon ferrochrome has tripled from about 64 cents per pound in January 2007 to $1.93 per pound as of mid-February 2008. “It isn’t that there is any problem with long-term resources,” says Mothersole. “However, the electricity crisis isn’t likely to be resolved in the near term—not in the next two or three months, to be sure.”

Wellnitz says that all appliance makers are looking for ways to reduce their costs in the face of rising material charges. “The last thing we want to do is pass on our costs. The market isn’t very receptive to that. There have been price increases, but they are nowhere near the increases in cost.” Such cost-cutting measures include using lower quality materials that look like stainless, using different gauges of metal or trying to negotiate more favorable long-term contracts with suppliers or customers.

Todman says that Whirlpool has made some cost-based price increases, as well as curtailing some production capacity. Price increases, Hale agrees, are necessary for companies to remain competitive in the marketplace.

2008 will be a challenging year, says Barrington. “Overall it will be similar to last year. Housing will not correct itself this year. The big question is what will happen with the overall economy. I hope that some of the money people are getting back from the economic stimulus bill will be used for appliances.”

North American appliance demand is expected to decline 3 to 5 percent in 2008, Todman says, with even larger declines during the first half of the year. The two sides of the market—demand and prices—will continue to move in the wrong direction, squeezing appliance makers in the middle, says Mothersole. “There could be some improvement in demand at the end of the year, but off of a very low floor, and there will continue to be pricing pressure.”